Up, Up and Away!

As we discussed in a previous issue titled, “The Pension Dilemma”, the focus is bleak for the retirement bound baby boomers. The demographics are startling and undeniable. When Social Security was launched some 70 odd years ago there were 15 people working for every 1 retiree. By 2020, it will be 3 to 1. Couple that with the fact that America’s blue chip corporations and civil agencies are seriously underfunded in their pension plans, and you have the makings of a real crisis. Ford is light $12 billion, General Motors $8 billion, Delta Air Lines $6 billion, ad nauseam. Without belaboring the point let’s just say that the combined shortfall of the 25 worst offenders exceeds $500 billion. If you are an American who is not yet retired, you had better pay attention. Especially if you rely on a company pension to see you through retirement. Everything you thought you could count on is tenuous at best. Civil agencies are also burdened with excess pension liabilities pushing the total shortfall to well over $1 trillion. Couple this liability with future public retirees health care and retirement costs, and a dire situation emerges. Far from being a future problem, this debacle is upon us now. In California, for example, over 50% of the state’s employees will become eligible to retire in this decade. To offset this shortfall, many public and private organizations have invested money in the highly volatile hedge funds. These actions have the potential to exacerbate the situation as witnessed with the spectacular crash of the Amaranth hedge fund. In case you didn’t pick this up, Amaranth was a hedge fund that lost an enormous amount of money on a natural gas bet gone bad. Our home state, New Jersey, saw a pension fund loss of $16 million. We should consider ourselves lucky. San Diego County lost $87 million. Losses in this one debacle exceeded $165 million. On the federal level, according to the annual trustees’ reports, Medicare liabilities exceed its assets by $32.1 trillion. That amount is triple the entire Gross Domestic Product of the U.S. The new Medicare prescription drug program will add $700 billion to the deficit over the next 10 years, based on current longevity standards. However, Americans are living longer and health care is getting more sophisticated. Geriatric illnesses such as Alzheimer’s disease, are affecting a growing portion of the population. Suggested solutions involve means testing of retirees, essentially saying that if your visible assets are sufficient enough you should not receive these benefits. Something must be done and soon, or Medicare will bankrupt the U.S. Treasury. With the national debt already rising by $10 billion every week it is doubtful Congress will be able to ignore this situation much longer. If a politician merely suggests that taxes should be raised, or benefits should be cut, he or she will quickly be out of a job. So what is a wily politician to do under these circumstances? They are simply taking the easy money approach. Rather than raise taxes or slash benefits, they’ll simply turn to the very pliant and willing Federal Reserve Banks. These privately owned institutions will use their power to increase the money supply and provide the money Congress needs to pay the shortfall. By debasing the value of money they can pay these benefits with dollars that will be worth substantially less. So the ultimate losers are those who have money saved in dollar accounts. These folks will witness a diminution in purchasing power. Considering the levels of dollar erosion in the last 40 years of relatively low inflation, it could be quite significant. Since 1975, a gallon of milk has doubled, a pound of coffee has tripled and a loaf of bread has quadrupled, postage has quintupled, a gallon of gas is up 600%, and college costs are about 12 times their 1975 levels. Our economy is already close to full employment, so the possibility of a prolonged imported inflation shock may tilt the balance towards further tightening of interest rates. Our actual cost of living is currently rising at multiples of reported levels and it will only get worse. If the Fed then monetizes this burgeoning debt, which inevitably they will, the results could be horrific.

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